The accuracy of economic forecasters put to the test

Who would be an economic forecaster? For many, it seems a fast track to ridicule as seen last week when the Office for Budget Responsibility (OBR) was forced to cut its GDP forecast for the second time this year.

The OBR slashed its 2011 forecast from 1.7% to 0.9% in a not unexpected move – but the figure is a far cry from the 2.1% it had forecast in January and then later cut in the March Budget.

So is the Treasury always so far off the mark and is anyone else consistently better at making predictions? The short answer in 2011 is no, not really.

At the start of the year, looking across 22 major investment banks, the average GDP growth forecast was 2%. BNP Paribas and Standard Chartered were the nearest to the mark, both envisaging 1.4% growth, while Citigroup and Credit Suisse were the furthest out, having predicted what now seems an overly bullish 2.5%.

Independent or non-City bodies fared no better, also averaging 2%. Outside the City, the range of forecasts was much wider, ranging from 1.1%, the closest prediction, which was made by the Centre for Economics and Business Research (CEBR), to the wildest at 3.1% by Liverpool Macro Research. The European Commission (EC) had predicted 2.2%, the OECD 1.7% and the IMF 2%.

Going back to 2010, as the UK exited recession in January, predictions were closer although they broadly undershot the 1.7% GDP growth that was eventually seen as economists consistently underestimated the strength of the recovery.

The average City forecast was 1.5%, with independents averaging 1.4%. Far more were a whisker away, however, with Daiwa, Bank of America Merrill Lynch, JP Morgan, Lombard Street and Société Générale all expecting 1.6%, while UBS and Credit Suisse had both predicted 1.8%.

Meanwhile, both the EC and the IMF undershot horribly with their forecasts of 0.9%, while the Treasury came in too low at 1% to 1.5% and the OECD 1.2%. The CEBR also blotted its copy book somewhat by calling 1.2% after being the closest in 2011.

So clearly it is too simplistic to say that commentators consistently overshoot in the good years and undershoot in the bad. The fact that the 2010 forecasts were made in January that year when the UK had just limped out of recession in the previous quarter after posting meagre GDP growth of 0.1% dampened their expectations.

The severity of the financial crisis certainly caught economists on the hop. In January 2009, the IMF predicted the UK’s economy would only shrink by 2.8% that year compared to the 4.9% it actually fell by.

The previous November it had envisaged the UK economy falling by 1.3%, more than the 1.1% decline that the OECD was expecting at the same time. But the OECD proved more fleet-footed, revising this down to -3.7% in April, more than treble its November forecast and lower than the 3.5% fall then chancellor Alistair Darling forecast in his April Budget. The OECD warned of a -4.2% drop in June and -4.5% in September, which jarred with the IMF, which did not move its forecast.

The Treasury did not mark down its growth expectations until the December pre-Budget, when it warned of a 4.75% fall, which still undershot the actual end figure.

So far, so confusing, but the evidence of the past three years does imply the OECD is more on the ball than the often overly bullish IMF and the OBR/Treasury, whose figures will always be felt to be politically biased, rightly or wrongly.

Looking forward to next year, the OBR is now anticipating 0.7% GDP growth down from 2.5% last March, but chancellor George Osborne said the UK ‘will avoid recession’.

Not according to the OECD, which warns of falling growth this quarter and the next pushing the UK into a double-dip recession. Overall it expects the economy to grow by a measly 0.5% in 2012, down from 1.7% previously.

Meanwhile the IMF warned the economy was in a ‘dangerous new phase’, cutting its forecast from 1.5% to 1.1%.

The City is offering a much more diverse range of outlooks, ranging from Schroders anticipating a 0.4% contraction to Capital Economics saying growth will flatline and Nomura predicting 1.5% growth. There are more bulls than bears outside of the City too, with Liverpool Macro Research expecting 2.2% growth and Economic Perspectives 2%, whereas the CEBR is forecasting 0.7%.

If the OECD and the CEBR can be deemed to be consistently among the most accurate, the OBR’s forecast of 0.7% looks close – but possibly the reality is closer to 0.6%, meaning that chance of a double-dip recession, however shallow, is very real.

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